The Financial Supervisory Commission (FSC) yesterday said that exposure to derivatives linked to yuan volatility has continued to decline as the Chinese currency fell to a new six-year low of 6.7 yuan against the US dollar.
In terms of total notional amounts and refundable deposits against client defaults, domestic banks’ exposure to yuan-linked target redemption forward (TRF) and double knock-outs (DKO) have continued to decline in the first eight months of this year, the commission said.
As of the end of August, the outstanding notional amount of TRF was NT$30.6 billion (US$967,960), down from NT$37 billion at the end of the first quarter, with the figure continuing to trend lower to NT$35.4 billion at the end of the first half, the commission said.
Total refundable deposits for TRF and DKO on a mark to market basis have fallen to NT$34.3 billion, compared with NT$100 billion at the end of last year and NT$34.2 billion and NT$42.7 billion at the end of the first and second quarter this year respectively, the commission said.
At the same time, banks have raised their provision against TRF defaults to NT$10.6 billion as of the end of August, with the figure jumping from NT$8.8 billion and NT$4.27 billion at the end of March and June respectively.
The commission said that the yuan-linked derivatives weathered a crisis in early January, when the yuan fell as low as 6.5 against the greenback, and that the markets would be more resilient against the latest bout of volatility.
Amid ongoing negotiations between investors and banks regarding settlement of massive losses triggered by the yuan’s weakening in the past two years, a local media report published yesterday pointed to another flareup as a local medium-sized industrial company has racked up as much as NT$20 billion in TRF-related losses.
“We found the amount listed in the report to be unlikely, and our investigation into the matter with banks did not uncover a company fitting the description,” an FSC official who declined to be identified said.
Regarding questions of whether clients were not fully informed of the derivative’s risks, the commission has ordered banks and affected investors who are in talks to move forward with the settlement timetable and begin either arbitration or mediation with third party institutions to two weeks.
The majority of larger-sized businesses utilize TRF as part of their foreign-exchange risk hedging strategy, but continued fallout from the troubled instrument has made the option less viable, leading to higher hedging costs, the official said.
He added that while many businesses view themselves as victims who were misled by banks, most are willing to shoulder their losses and preserve long-running relations with their lenders.
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